The Breakdown - Why Web 3 and Digital Money Should Be Private by Default

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, February 6th, and that means it's time for Long Reads Sunday. And today, we are talking privacy. First, however, if you're enjoying the breakdown, please go subscribe. subscribe to it, give it five stars, give it a sweet little rating. Or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes, or you can go

Starting point is 00:00:45 to bit.ly slash breakdown pod. Now, it was recently Privacy Week at CoinDesk, and so we got a whole slew of great content to draw from. And so today I'm actually going to read two different pieces. It's going to be privacy in the context of Web 3 and privacy in the context of Bitcoin. And we're going to start in Web 3 with a piece from Tor Bear of the Secret Foundation who writes, don't let Web 3 repeat Web 2's mistakes. Web 3 must be private by default. Crypto has undergone an impressive spate of growth recently. We've gone from a few hundred users of non-fundable tokens, NFTs, a couple thousand Ethereum node operators, and maybe a multitude more of Bitcoin holders, to several million investors and users across the industry. It's wonderful.

Starting point is 00:01:31 There's an open online world where anyone can create, build, and explore, without permission. That value is being created and freedom preserved, but there's something being lost in the mix. Privacy. Web 3, the buzzy corner of crypto that spans everything from play to earn gaming to collectibles to decentralized finance, seems to be repeating the same missteps of Web 2. Although touted as a solution to the perils of internet centralization by letting people own their own data and earn rewards for the value they create, Web 3 is failing on those big promises. And with some of the biggest Web 2 builders entering the Web 3 space, the problem may only get worse. The Web2 economy was built on a simple idea. Collect a cheap resource

Starting point is 00:02:10 at scale, user data, then repackage and monetize access to it as an expensive product. It gave users near unlimited ability to create content and connect globally while giving advertisers a captive audience. Companies including Facebook and Google built trillion-dollar businesses in walled gardens around this arbitrage, then changed their names, meta, alphabet, to distance themselves from the extractive platforms that allowed for their obscene growth. Along the way, user privacy was not merely ignored, it was abandoned. It was only after the Cambridge Analytica whistleblowers came forward that we truly became aware of how our data was being misused and resold, occasionally at the expense of democracy

Starting point is 00:02:47 itself. Almost every Web2 company has dealt with massive privacy failings and data breaches from Uber to Equifax to LinkedIn to Alibaba. Despite all the lofty promises of Web3, it has not solved this core issue. While the blockchain world is indeed far more open than Web 2, it is actually far less private. Blockchains leak all user data by default, not just to Cambridge Analytica, but to anyone who glances at the blockchain. The dominant public-by-default model means users must give up control of their data by default

Starting point is 00:03:17 as well. This failure means Web 3 is not becoming user-centric after all. Public-by-default systems and blockchains re-centralize and converge to win-or-take-all structures. Whoever has the resources to make best use of all the publicly available data will capture the majority of the value. In other words, the rich get richer and users lose their control. Web3 companies like Chainalysis have achieved multi-billion dollar valuations on this play. Minors, the computers that secure an order blockchains, routinely front-run users

Starting point is 00:03:43 based on their privileged view into publicly available data. Meanwhile, Web2 companies like Meta, the former Facebook, are clearly seizing the next multi-trillion dollar opportunity by concentrating their entire focus on the emerging Metaverse. The same companies that shattered online privacy in the age of social media are now angling to control our open Metaverse, wielding war chests of billions of dollars in hopes of capturing trillions. There are two bad choices. An open Metaverse that leaks all data by design, and a metaverse owned and operated by the same companies that routinely exploit user data. We need to actively reject both. As we watch the Metaverse emerge and build its foundation, we must be

Starting point is 00:04:20 aware of and actively work towards a better model. Web 3 in the Open Metaverse must embrace privacy by design, protecting users by default, and allow them to consent to and benefit from the use of their data. It's not just a dream. Tens of thousands of users in our community around the world are already building and using private by default, decentralized, and self-sustaining applications that are truly empowering. We've been working towards this vision since 2015, and with the stakes higher than ever, this is the perfect moment to join our fight. A metaverse that protects our privacy is the only one worth creating and the only one worth living in. Nexo is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button and start earning.

Starting point is 00:05:01 up to 18% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries trust Nexo with their digital assets. So whether you're just getting started or you're a season pro, get the most of your crypto today with Nexo at nexo.i.

Starting point is 00:05:31 Meet Arculus, the next generation cold storage wallet. Arculus secures your crypto using three-factor authentication, providing a simpler, safer, and smarter way to store, buy, swap, send, and receive crypto. Arculus is offline cold storage. Your private keys are encrypted on the Arculus keycard and are never online. Stay safe from hackers with no cords, no charging, no Bluetooth. Just crypto security made simple. Buy now at getarculus.com. That's G-E-T-A-R-C-U-L-S dot com. The breakdown is sponsored by FTX US. FtX US is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors.

Starting point is 00:06:21 There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use refurb. code breakdown to support the show. All right, there's Web 3 and Privacy. Next, let's talk Bitcoin and Privacy.

Starting point is 00:06:51 This piece is by Murtaza Hussein, and it's called Bitcoin Protects Privacy and Fights Oppression. Surveillance is power, as authoritarian regimes across history have known. The emergence of the Internet in the late 20th century made surveillance easier than ever by creating a historically unprecedented repository of information about individuals and organizations stored on servers throughout the world. Over the years, the danger of the internet's panopticon have pushed many ordinary people to fight back, advocating for regulation via their governments where possible, but also by developing their own technological defenses,

Starting point is 00:07:23 including popular tools like encrypted email and messaging platforms. It is no exaggeration to say that without privacy, individual freedoms cannot long survive, and the battle for privacy in the digital age is now headed to its newest and perhaps most consequential stage with the emergence of central bank digital currencies. CBDCs are central government's attempts to turn blockchain technology to its own use, utilizing its efficiencies for storing and transferring value, but also through the social control via surveillance that makes it possible. CBDCs have clear benefits over the analog financial system, but alongside the promise

Starting point is 00:07:55 of increased financial access and efficiency, they also expose citizens to a level of potential surveillance inconceivable in the past. An authoritarian government administering a CBDC would have total oversight of every transaction, anywhere on Earth that use that currency, as well as the ability to freeze, expropriate, or even for-spend, funds owned by private individuals as it deemed fit. The prospect of such state-controlled currencies like the digital yuan already being rolled out in China also highlights why a technology like Bitcoin might wind up in future being the only insurance against financial repression in authoritarian countries and even in democracies like the United States.

Starting point is 00:08:32 The gravity of this issue as it pertains to privacy and surveillance is especially clear to me. As a journalist, I spent years reporting on classified documents provided by National Security Agency whistleblower Edward Snowden. The documents showed an incredible detail the powers the U.S. government had gained to surveil and by extension control the lives of individuals whose communications fell under its massive global dragnet. Behind the scenes, the NSA had developed the power to collect essentially any private message or metadata it sought from devices around the world, including from American citizens who had never suspected the level of power their government privately held over them. Surveillance can ruin lives, and I have seen up close the impact it can have on innocent people caught up in a digital dragnet. CBDCs have the potential to supercharge the surveillance power created by the internet even further.

Starting point is 00:09:20 Whereas Web 2 revolutionized how information could be created and spread, Web 3 will do the same for the creation and dissemination of economic value. Governments will seek to have as tight a control as possible over this just as they did with the Internet. The prospect of a government in a country like China having near total ability to monitor and manipulate the information at Citizens C has been serious enough, but as soon seems possible, it gains the same level of control over people's ability to conduct even the smallest economic activity. But as soon seems possible, it gains the same level of control over people's ability

Starting point is 00:09:51 to conduct even the smallest economic activity? We will be in an altogether new world of repression. Many countries around the world are already following China's lead in developing their own CBDC projects, including the United States with a digital dollar. Americans will likely expect that their government will act in good faith and how it administers such a currency, creating and enforcing regulations that protect their privacy and freedom. But as the Snowden documents have already shown, assumptions of good faith are not particularly durable. Politics can help secure rights, but it's not enough.

Starting point is 00:10:21 Just as encrypted email and messaging platforms give individuals a robust personal defense against surveillance abuse, decentralized currencies like Bitcoin represent a possible safe haven against future government overreach in a world built upon CBDCs. The debate now taking place over the future role of Bitcoin and other cryptocurrencies rarely takes the issue of privacy in the digital age into account. Bitcoin is often accused by critics of having no worthwhile use case or for serving as a tool for criminals and terrorists to conceal their activity. But similar accusations were often leveled against encrypted email in the past.

Starting point is 00:10:52 While it's true that criminals sometimes also benefit from the existence of privacy, that same privacy is what allows the vast majority of law-abiding citizens to preserve their civil liberties. counting on regulation alone to do the job of protecting privacy on its own seems like a poor wager, given that regulation has failed to ensure such protections in democracies like the United States. Such a prospect of benevolent governance does not even notionally exist in undemocratic countries. It is not hard to imagine a future coming where Bitcoin and other currencies are the only safe harbor for people fleeing government abuses that have, sadly, proven to be common across the world. In 1975, describing an analog age of spying that involve phone taps and physical

Starting point is 00:11:30 bugging that we would now consider quaint, Senator Frank Church from Idaho, warned of the dangers of the information surveillance regime already growing in the United States. The surveillance power of the government and its security agencies could, quote, at any time be turned around on the American people, and no American would have any privacy left. Such is the capability to monitor everything. Telephone conversations, telegrams, it doesn't matter. There would be no place to hide, he said. Church spelled out what it would mean for democracy. If a dictator were to ever take power in the United States, that person could use surveillance, quote, to impose total tyranny, and there would be no way to fight back. The government now has surveillance powers beyond what Senator Church could ever

Starting point is 00:12:10 dream of that, and those powers are on the cusp of becoming even more powerful as digital currencies rise to prominence. These state-backed digital currencies will be the next battleground in the fight over privacy and no weapon can be discarded in defense against their possible abuse. Bitcoin is not exempt from critique, but because of its decentralized protocol, it is the most likely bet to offer strong resistance against a future financial penopticon. Those who have known what it is like to have their freedoms quashed by regimes of surveillance and social control in the United States and abroad know the potential virtues of censorship resistance currency cannot be lightly dismissed. Neither Bitcoin nor cryptography in general can be a wholesale substitute

Starting point is 00:12:46 for politics, but they offer a practical way to protect the most vulnerable from predation in the digital age. In the brave new financial system now on the horizon, they are tools we will need on our side. So obviously between these two pieces, and this is NLW again, there is a lot to consider as it relates to these questions of privacy. I think the point that I want to make or just reinforce is that this is a conversation that we need to have. Anytime you're involved in building or distributing or just investing in, a set of new technologies that really could disrupt the current order. You are engaging in a values conversation whether you realize it or not. Technology may be

Starting point is 00:13:28 agnostic, but design decisions tend to lead themselves to social ramifications that are not. Bitcoin being pseudonymous but not anonymous is one of those design decisions. And there are many critics who think that Bitcoin isn't private enough. However, the specific ways we design a CBDC will also have pretty significant impacts. I think Murtaza's point here is that even in the best case scenario where we argue and fight and get serious privacy concessions, a digital currency that actually has similar properties of cash built into its design, it may not be enough because the possibility of abuse, even if below board and behind the scenes, is never far away. For that reason, he argues,

Starting point is 00:14:10 we need these alternatives, and I strongly agree. However, I also would say that it's still worth having that fight when it comes to CBDCs. There is a large group of people in Congress in the Senate who agree that if these technologies are going to be the future of the American dollar system, They need to have those privacy-preserving features built in. In fact, the only way that it might be constitutional to have that form of money is with those privacy provisions built in. That doesn't mean that three-letter agencies won't abuse it, but it certainly changes the nature of the power they are given to do so. I want to say thanks again to my sponsors, nexo.io, Arculus, and FTX for sponsoring the show. And thanks to you guys for listening.

Starting point is 00:14:50 Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why Web 3 and Digital Money Should Be Private by Default

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